Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
BREWING FINANCIAL CRISIS 2.0 Suggests RECESSION 2022 - 28th Jan 22
Financial Stocks Sector ETF XLF $37.50 Continues To Present Opportunities - 28th Jan 22
Stock Market Rushing Headlong - 28th Jan 22
The right way to play Climate Change Investing (not green energy stocks) - 28th Jan 22
Why Most Investors LOST Money by Investing in ARK FUNDS - 27th Jan 22
The “play-to-earn” trend taking the crypto world by storm - 27th Jan 22
Quantum AI Stocks Investing Priority - 26th Jan 22
Is Everyone Going To Be Right About This Stocks Bear Market?- 26th Jan 22
Stock Market Glass Half Empty or Half Full? - 26th Jan 22
Stock Market Quoted As Saying 'The Reports Of My Demise Are Greatly Exaggerated' - 26th Jan 22
The Synthetic Dividend Option To Generate Profits - 26th Jan 22
The Beginner's Guide to Credit Repair - 26th Jan 22
AI Tech Stocks State Going into the CRASH and Capitalising on the Metaverse - 25th Jan 22
Stock Market Relief Rally, Maybe? - 25th Jan 22
Why Gold’s Latest Rally Is Nothing to Get Excited About - 25th Jan 22
Gold Slides and Rebounds in 2022 - 25th Jan 22
Gold; a stellar picture - 25th Jan 22
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Why the Volcker Rule Is Now 3x Longer

Stock-Markets / Financial Markets 2013 Nov 20, 2013 - 03:47 PM GMT

By: Money_Morning

Stock-Markets

Shah Gilani writes: Let’s talk about the so-called Volcker Rule.

When the Dodd-Frank Act was signed into law in 2010 – the bank-busting, save the system, “we’ll never again have a financial meltdown that could destroy the world” legislation – it was more of an outline.


The ostensible idea, in the aftermath of the credit crisis, was to give regulators time to write sensible rules and not throw the baby out with the bathwater. Yeah right.

Of course, the real deal was about giving banks and financial services institutions time to fight every rule and regulation, from first drafts to final implementation.

Along the way, it was proposed that banks should spin off their risky businesses into separately capitalized companies, in the form of what an investment bank or a merchant bank used to be. That way they could play hard and fast. And if they failed, tough luck, you’d be on your own. Meantime, the sister bank would have FDIC insurance to cover its depositors and make loans and do traditional bank things. Boring and stuffy bank things.

The Obama administration didn’t go for that. President Obama, for all his bluster about bad banks needing a spanking, didn’t go for that.

Obama advisor Paul Volcker – himself one the most revered and celebrated Federal Reserve Chairmen in the institution’s 100-year history – wanted the separation of gun-slinging banks from insured depository institutions. He suggested banks stop proprietary (or “prop”) trading altogether. (That’s betting the house’s money to make outsized gains to enrich the homeboys who are pulling leveraged levers for fun and profit.)

That suggestion became known as the Volcker Rule.

There’s still no finished Volcker Rule. When I wrote about it 18 months ago, it was 300 pages long (see “Why the Volcker Rule Is a Cop-Out and a Joke“). There’s now a 1,000-page draft circulating with all kinds of marks and bruises all over it. But it’s not done, not nearly done. It’s one rule.

Part of the problem is that banks and bank lobbyists and Congressmen in the banks’ pockets are trying to stymie what they don’t like, meaning the rule itself.

But the bigger problem is this: No fewer than five regulatory agencies are collaborating on the rule.

The Fed and the SEC want to cut banks as wide a highway as they can, so banks aren’t “hindered” from doing what they do that facilitates smooth-running capital markets. The CFTC and the FDIC want to fill in the loopholes being written into the rule. The OCC, they’re clueless anyway, so they’re just reading drafts over lunchtime martinis.

It all comes down to banks wanting to conduct “important functions” – such as market-making and hedging – without stupid restrictions. After all, market-making is not proprietary trading, they say, and hedging, well, that’s hedging, they say.

I was a market-maker (that’s an official stamp) on the Floor of the CBOE. And I was the hedge trader for one of the world’s biggest banks. Let me tell you what market-making is and what hedging is… really.

Market-making is when you are supposed to make a two-sided market. It’s your job to simultaneously bid and offer for a stock, an option, a commodity, whatever.

I’ll use stocks as an example. If you (supposing you’re a broker or dealer or floor trader) ask me for a “quote,” I have to give you a price I would buy the stock at and a price I would sell you the stock at and how much stock I am willing to buy or sell.

You might want to ask a bunch of market-makers what their quotes are (or these days you see what their quotes are on your computer screen), and you try to buy at the lowest price being offered by some market-maker or sell at the highest price some other market-maker is quoting.

Market-making is all about taking risks. Market-making is itself proprietary trading. You want to buy stock, and I sell you stock. I did that to facilitate you. But in doing so, I took a position, I sold you stock, maybe I sold you stock I didn’t own, so I shorted the stock to you. I am now short the stock. I have a position. I have on a proprietary trade.

Let’s say you’re a big customer and you want to buy a ton of stock from me. I will go out and amass a huge position, because I’m going to facilitate you. I’m making a market for you. I’m taking a huge risk building up a position that you said you want to buy. What if you don’t buy that position I’ve built up? What if I made up the fact that I had a customer that I needed to facilitate? What if I just wanted to pretend I was making a market but really wanted to amass a huge position to make money for my trading desk, for my bank, for my bonus pool?

How on earth are regulators going to know if banks are taking proprietary positions and just calling them client-related positioning or market-making? They aren’t. It’s a giant loophole.

Hedging? Let me say this about that. Hedging is when you have an at-risk position and you don’t like the risk. So, instead of just dumping the risk position (which is better than hedging), which you may not be able to do or unwilling to do for any number of reasons, you put on a hedge. A hedge is another position that makes money if your other position loses money. A perfect hedge (which is very hard to accomplish) means you don’t lose any money. You don’t make money, but you don’t lose money. An imperfect hedge will result in you probably losing some money, and once in a blue moon, you can make a little money on a hedge.

If you’re a bank, though, you can make a ton of money on a hedge, or you can lose a ton of money on a hedge.

Why? Because you weren’t really hedging. You were saying you were hedging. But you were taking another position with a lot of risk to make money on that part of your hedge.

You weren’t hedging. You were lying about hedging. You were prop trading.

That just happened. The JPMorgan “Whale” trade in London, the one that lost them $6.5 billion, that was a “hedge” trade. Yeah, that’s what they called it. It was a hedge trade that went bad. That was a prop trade lipsticked-up and called a hedge trade.

Market-making and hedging are both loopholes. They will be used to prop trade. It’s that simple.

Treasury Secretary Jacob Lew is pushing hard to get the Volcker Rule done by year-end, this year. But the Fed now wants to give banks until July 2015, instead of 2014, to implement whatever it looks like.

If the rule ends up being 1,000 pages, you can guess why it’s that long. It’s that long so that there will be enough fine print loopholes in it to give banks what they want… the ability to prop trade and not call it proprietary trading.

The only thing I can tell you for sure about this pending Volcker Rule is this: When it comes out, I will read it and I will spell out for you where the loopholes are and how banks will use those loopholes.

That much I can promise you.

Shah

Source :http://www.wallstreetinsightsandindictments.com/2013/11/why-the-volcker-rule-is-now-3x-longer/

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in